A short time ago, I was travelling through Wichita, Kansas, on one sunny day and happened into a small, out-of-the-way book store where I made a spectacular find: an 1898 print of “Money and the Mechanism of Exchange” by W. Stanley Jevons. To most this would be a very obscure, old book, but to a finance major with a passion for economics, it was like discovering gold. In this book, Mr. Jevons lays out the history of different currencies used in different places and times, as well as their pros and cons.
My real fascination with this book is that it was printed long before the United States came off of the gold standard in 1933 (meaning that we no longer backed our currency with physical gold), when President Franklin Roosevelt signed H.J. Res. 192, an idea that Jevons couldn’t really approach and would likely consider absurd. He seems to warn strongly against the idea on page 31, stating, “Since money has to be exchanged for valuable goods, it should itself possess value, and it must therefore have utility as the basis of value.”
With this quote, Jevons makes an all important distinction between utility and value. Value is simply a function of the market: what can you trade this item for? If you can trade a dollar for 5 bottles of water, its value is at 5 bottles of water. However, utility is a measurement of how much you need or want to consume a good or service. If you’ve been traveling for 12 hours through the desert without water, those water bottles are a high utility item that you would be willing to pay a lot more for. The problem is you can’t drink a dollar bill.
Jevons explains that in world history, a wide variety of commodities have taken the place of money, such as cattle, sheep, salt, commonly grown vegetables, and even handmade nails. The one thing they all have in common is a practical use, other than as currency. Even with the introduction of the legal tender system, you could actually exchange your promissory notes for gold.
This begs the question: why do we value the dollar? It can’t be eaten, melted down, OR used for decoration or construction. In reality, kindling is the only practical use for it, making it about as valuable as the hundreds of dry leaves currently in my front yard. We believe it has value because we trade it for valuable things, but we shouldn’t let that fool us into thinking the dollar itself has any stand-alone value.
The counter to this point is, of course, that the United States government guarantees its value by taking action if the dollar’s value started spiraling out of control. This is why we value the dollar: We don’t really believe our government is inept enough to let its value collapse. In other words, we can be as confident in the dollar as we are in our country’s ability to prop it up. Surely, if for some reason the dollar’s value started spiraling out of control, the US government would take action to keep things in order.
Well, I’m here to tell you our government is that inept. We have about 106 trillion dollars in unfunded liabilities, compared to 132 trillion dollars in total national assets (assets reported by all businesses and individuals). Thanks to both the Republicans and Democrats, the federal government has pranced around for decades spending tax revenue that’s assumed to be collected over the next 100 years. If the federal government was a business, it would have been bankrupt a long time ago. Yet, this marvelous institution is what we trust to ensure the value of the currency holding up the world’s economy.
God help us.
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